Digital Asset Brokers: Proceed with Caution

The IRS has effectively delayed the implementation of the new digital asset broker rules under Internal Revenue Code Sections 6045 and 6045A.

The US Treasury Department (Treasury) and Internal Revenue Service (IRS) recently provided an update to taxpayers on the regulatory status of the digital asset broker reporting rules in Announcement 2023-2 (the Announcement). Until the issuance of new final regulations under Sections 6045 and 6045A, the Announcement explains that brokers “may” report information required under the laws and regulations existing as of December 23, 2022. Although not entirely clear, it also appears that the Treasury and the IRS are confirming that taxpayers who were not brokers with reporting requirements prior to January 1, 2023, will not be required to report or furnish additional information, or file any returns with the IRS on transfers of digital assets until new final regulations are issued under Sections 6045 and 6045A.

It’s been over a year since President Joseph Biden signed into law the Infrastructure Investment and Jobs Act[1] (IIJA) on November 15, 2021. This historic bill was the first enacted tax legislation to mention any kind of digital asset or cryptocurrency. Section 80603 of the IIJA amended the definition of broker in Section 6045(c)(1)(D) to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

Starting January 1, 2023, the amendment requires “brokers” of digital assets[2] to report information to the IRS.[3] There was an industry concern that the broad definition of broker would require not only “brokers,” but also digital asset miners, stakers, and software developers to report transactions under this new amendment.

On December 14, 2021, a group of senators who participated in a colloquy addressing the definition of broker under the IIJA amendment,[4] sent a letter to Treasury Secretary Janet Yellen.[5] The letter urged Treasury “to engage in rulemaking under the Administrative Procedure Act (APA) in an expeditious manner” and “provide information or informal guidance as soon as possible – no later than the end of the current calendar year [2021] – regarding the definition of ‘broker’ as discussed during the legislative process.”

Treasury Assistant Secretary for Legislative Affairs Jonathan Davidson responded to the letter on February 11, 2022.[6] Davidson’s letter noted that Treasury intends to issue a notice of proposed rulemaking to “govern the development of the regulations implementing information reporting by brokers of digital assets.”[7] For the remainder of 2022, the digital asset industry and its advisors eagerly anticipated the IRS’s notice of proposed rulemaking in this space. Members of Congress continued to publicly press Treasury to issue guidance as soon as possible.[8]

On December 23, 2022, the IRS released Announcement 2023-2, describing “transitional guidance” under Sections 6045 and 6045A and the reporting of information on digital assets by brokers. According to the Announcement, Treasury and the IRS intend to “implement section 80603 of the Infrastructure Act by publishing regulations specifically addressing the application of sections 6045 and 6045A to digital assets and providing forms and instructions for broker reporting.” A notice of proposed rulemaking will be published including the proposed regulatory text, explanation of the proposed rules, solicitation of public comments, and notification of a public hearing. After consideration of these comments and testimonies, the IRS will release final regulations.

Until final regulations are released, the Announcement provides that brokers of digital assets:

• “may report” gross proceeds and basis as required under existing law and regulations as of December 23, 2022;
• “may furnish” statements on transfers of covered securities as required under existing law and regulations as of December 23, 2022; and
• “will not” be required to report or furnish additional information with respect to dispositions of digital assets under Section 6045, or issue additional statements under Section 6045A, or file any returns with the IRS on transfers of digital assets under Section 6045A(d) issued.

Currently, Section 6045(a) provides that every person doing business as a broker[9] “shall, when required by the Secretary” make a return showing the name and address of each customer including additional details such as gross proceeds from a sale. Section 6045(b) requires a person doing business as a broker to file information returns and furnish payee statements to customers by February 15 of the following calendar year. Brokers must file information returns on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, with the IRS by February 28 (or March 31 if filing electronically) of the year following the calendar year of the sale. The existing regulations under Section 6045 do not specifically address how these requirements apply to sales, exchanges, or basis reporting of digital assets.

Section 6045A(a) requires a broker or any applicable person who transfers to another broker “a covered security (as defined in section 6045(g)(3)) in the hands of such applicable person” to furnish to the receiving broker a written statement no later than 15 days after the transfer.[10] The existing regulations under Section 6045A require transfer statements to include specified information about the customer, the brokers, type of security, and the covered security’s total basis. Like Section 6045, the existing regulations under Section 6045A do not specifically address the extent to which these requirements apply to transfers of digital assets.

Section 80603 of the IIJA amended both of these sections to address digital assets. In addition to expanding the definition of broker under Section 6045, Section 80603(b)(2) clarifies that transfer reporting statements required by Section 6045A(a) applies to transfers of digital assets. Additionally, Section 80603(b)(1) modifies the definition of specified securities subject to basis reporting under Section 6045(g) to explicitly include digital assets and provides that these specified securities are treated as covered securities for purposes of basis reporting if they are acquired on or after January 1, 2023.

Despite these changes set to take effect on January 1, 2023, Announcement 2023-2 advises that brokers of digital assets may proceed under existing law and regulations as of December 23, 2022, until the IRS releases final regulations addressing digital asset brokers. The Announcement may bring little comfort to the digital asset industry because the IRS itself views an announcement as “a public pronouncement that has only immediate or short-term value.”[11]

The Announcement also does not conclusively resolve whether the applicable statutes themselves might apply to brokers of digital assets in the absence of regulations. The Announcement acknowledges that existing regulations “do not specifically address the extent to which” the statutory requirements might apply to digital assets and brokers in them. However, the Announcement concludes that brokers “may” report information and “may” furnish statements under existing law and regulations but “will not” be required to report additional information until final regulations are issued.

Participants in digital asset transactions are encouraged to consult tax advisors about their current reporting obligations and, to the extent they have not done so already, consider beginning to implement systems that can track the information typically required to be reported to the IRS (e.g., customer’s name, address, tax identification number, gross proceeds of the transaction, etc.).